Industrial production peaked this summer, growing at a rate of 10.9% year-on-year in June. Contrary to government forecasts, however, inflation has continued to rise despite the appreciation of the ruble, which continues to grow stronger against the backdrop of increasing imports and a declining export surplus.
Will the government, with only several months left until the next elections, fulfill its promise to hold down inflation and keep the economy balanced? Top economic officials badly need to chalk up some achievements in order to improve the chances of the current government in the forthcoming elections.
The Finance Ministry predicts that prices will not grow by more than 8% in 2007 and expects economic growth of 7.1%. No one questions the stability of Russia's economic growth, but the inflation promise may prove difficult to fulfill.
According to the Federal Statistics Service, the Russian economy grew by 7.8% in the first half of this year. Government experts expect the figure to reach 8% by the end of the year, which opens the door to a doubling of GDP by 2012-2014. The investment and consumer boom spurred the growth of industrial production to a record 7.7% in January-June. The Economic Development and Trade Ministry intends to upgrade its growth forecast for the year from 5.2% to 7%.
The Institute for the Economy in Transition (IET), a Russian think tank, reported a decline in the growth of industrial sales in July. Warehouses are filled to capacity, which points to a disparity between production and sales.
Government forecasts are optimistic, but the current economic indices have called into question whether it will meet its inflation targets. Experts from Italy's UniCredit Bank say the high price growth is one of the main risk factors holding back Russia's economic development.
Another negative factor is the rapidly growing foreign debt of private and state-controlled companies, accompanied by an increase in the share of short-term loans in the credit portfolio of non-financial organizations. This makes the economy vulnerable to sharp fluctuations of the ruble exchange rate and to a decline in export prices.
According to a poll conducted by the IET, inflationary expectations exceeded 36% in June compared with 31% in May, and those figures have turned out to be prescient: inflation for January-July was 6.7%.
To keep within the planned limit of 8%, the government must limit price growth to 1.3% in the remaining months of the year. The Institute's experts have calculated that inflation will reach 9.7% this year. Specialists from the Economics Institute of the Russian Academy of Sciences have changed their inflation outlook from 8.1% to 8.7%. Meanwhile, John Litwack, the World Bank's chief economist in Moscow, said: "Inflationary pressure is rising, and we won't be surprised if inflation hits 9%-10%."
Despite the economists' skeptical attitude, Finance Minister Alexei Kudrin believes the government will keep inflation below 8%. "The government and the Central Bank have enough tools to regulate the monetary factors tied to inflation," he said.
At the beginning of the summer, the Finance Ministry and the Central Bank expected the seasonal decline in prices in the fall to help them keep inflation down. Now they can rely only on ruble appreciation.
The Russian monetary authorities can make up for the growth of prices by allowing the national currency to strengthen to 24 rubles per $1. Or they can let imports grow and the external surplus to plummet. The less foreign currency there is in the country, the fewer rubles they will have to print to buy surplus export revenues.
But the use of these instruments has a negative side effect. Ruble appreciation at a time when the external surplus is dwindling is bound to sour the mood of Russian producers. So even optimists will have to admit soon that price growth will not be limited to 8% this year.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
